Bill Ackman today followed yesterday’s letter to J.C. Penney Company, Inc. (NYSE:JCP) with this one:
Hello My Fellow Directors:
I think JC Penney is at a very critical stage in its history and its very existence is at risk. During a period like this one, it is absolutely critical that we work together to solve our problems. It is essential that our board function extremely effectively or we will certainly fail. In my history as a board member of many public companies over the last 15 years, I have never before released a public letter to a board of which I was a current member. That was admittedly an extraordinary step, but you should understand that I did so as a last resort after attempting to negotiate a resolution of my concerns about the recruitment process with our Chairman and the Company’s advisors over the last week. After having read the board’s public response to my letter and considering the events of the last few weeks, I am concerned that a small subset of the board is negotiating and speaking on behalf of the full board, that the rest of the board has not been properly informed and has not been given an opportunity to express its views, nor is even included in deliberations about what to do.
A proper functioning board needs to be fully informed about all material facts about a corporation in order to make deliberate and intelligent decisions. Extreme candor among directors is critical. Directors need to hear from one another in an open forum so all issues can be aired in a transparent fashion.
Directors must put personal relationships and issues aside that might color their decision-making process. The board must be led by a Chairman who is unbiased, can make decisions without regard to personal relationships, and focused only on what is best for the corporation.
In recent weeks, our board has ceased to function effectively.
Material information is not being properly shared with the board, and the board does not have access to independent advice.
As the Chairman of the Finance committee, I need to have full access to the financial affairs of the corporation in order to help lead the board in making critical financial decisions in fulfilling my fiduciary duties. When Mike became CEO, he terminated Alix Partners and cutoff Blackstone from access to information and a role in assisting us in analyzing the current state of affairs. My team was similarly cut off from access to information. This is despite the fact that when I joined the board, the Company explicitly agreed in writing to allow the Pershing Square analysts access to information so that they could assist me in analyzing the financial affairs of the Company. Alix Partners and Blackstone were hired by the Board to assist the Board in its deliberations and to help the Company in controlling cash, expenses, and future commitments. It was entirely inappropriate for Mike to terminate the board’s advisors without the board’s knowledge or consent. We are now flying blind.
While I like Robert Pruzan and Centerview, they are Mike’s advisors, not the Board’s financial advisors. They are conflicted, therefore, in providing independent financial advice to the board. Robert is therefore not likely to recommend that Mike should be terminated, nor is he going to criticize any decisions that have been made by Mike. He is not going to show us projections that would lead one to the conclusion that management should be changed. We are therefore not able to receive the objective advice that we need in order to make intelligent decisions.
Bob Peterson and Susan Ray were very helpful to me and my team and the board in understanding what was going on J.C. Penney.
I, and I believe, the rest of the board thought very highly of both of them. Once Mike became CEO, Bob and Susan said they were no longer authorized to answer our questions. When I confronted Mike directly, he reluctantly agreed to allow Bob and Susan to speak to my team. Last week, Bob was constructively terminated (his strategy position was eliminated and he was offered a middle-tier position in the finance department, so he quit). I was told that Susan was fired last week. I do not know the basis for her termination.
Material hiring and firing decisions are being made without the board being properly consulted. Our marketing has been a major problem. I thought we had begun to make material progress when Sergio was brought in as a consultant. Marketing messages were tested. Data were generated to determine ROIs of our various campaigns. Traffic was recovering, Mother’s Day was strong, and we appeared to be recovering. Unfortunately, Mike fired Sergio without the board’s consent. He has now hired Debra Berman, a friend of Mary Beth’s from Kraft. No other candidate was considered for the position as far as I know.
Up until Mike’s current tenure, there was a process for hiring executive officers. They would be vetted, at a minimum, by the compensation committee, and their package would be considered by the committee and recommended to the board for its approval. In light of the fact that Ms. Berman is a friend of a director, particularly one who is Chairing the search committee, this new executive’s hiring should be analyzed with greater scrutiny.
Sometimes CEOs hire friends of directors in order to curry favor with those directors. While I am not suggesting that this is what has happened here, proper process was not followed in this personnel decision.
Furthermore, in light of the criticality of this role and the difficulties we have had in this area, one would reasonably have assumed that the full board would have had the opportunity to interview Ms. Berman. That could easily have been accomplished at the last board meeting for apparently her hiring was being negotiated at that time. As Allen Questrom pointed out in his interview on CNBC yesterday, the decision to hire a consumer packaged goods marketing executive as the CMO of J.C. Penney is a strange decision. The skills and experience one learns from marketing lunch meats and American cheese to consumers are not logically applicable to marketing JCPenney to our customer base.
Imagine my surprise when I learned of Ms. Berman’s hiring from a press release on my Bloomberg machine. Unless the compensation committee met to consider Debra without me, Mike hired Debra without the approval of the comp committee. I and other directors still do not know how much she is being paid, how much equity she has been granted, etc. This is entirely inappropriate in my view.
I am very concerned about personnel decisions that are being made without the board being asked for its consent or even notified. It appears to me that a lot of other qualified people have been terminated, individuals with no experience in a particular function are given important roles in that area, and that some very questionable hiring decisions have been made.
For example, at the last meeting, Mike mentioned that he had made a member of the merchant team head of real estate and construction even though